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The proposal has been born out of the Federal Government sponsored Home Ownership Taskforce enquiry into how to make housing more affordable for low-income earners. The enquiry has been conducted through the Menzies Research Centre, a Liberal Party think-tank chaired by Malcolm Turnbull, and led by economist Christopher Joye.
The new product has been coined "equity finance", and the two players currently leading the charge with different models are Wizard home loans and the property research firm Residex. Residex says it has already applied to patent its model, with a likely release of its product before Christmas 2003. Wizard expects its product version to be available within 12 months. The larger banks may then follow.
The principal features of "equity finance" are as yet to be set in concrete, but the following appear to be the rough fundamentals:
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The home buyer/property investor need only pay 70% of the property price |
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Consequently, the home buyer/property investor need only raise 70% of the normal deposit required and will only need to meet 70% of the loan repayments (more accurately 100% of the 70% finance obtained) |
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The home buyer/property investor would maintain full control of the property, would be responsible for all rates and maintenance costs, and would determine if and when to sell the property |
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Property investors would still benefit from 100% of the rental returns, despite only making repayments on 70% of the property purchase price |
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The remaining 30% of the property price would be funded by an institutional investor (determined by the lender) |
If/when the home buyer/property investor chooses to sell:
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The home buyer/property investor would only realise 40% of any capital gain or 70% of any capital loss generated |
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Conversely, the institutional investor would reap 60% of any capital gain or 30% of any capital loss |
Although the original aim was to make it easier for low income earners and first time home owners to access the home ownership market, many economists predict that it will be self-defeating and will push property prices even higher.
The Australian Consumers Association has a number of concerns. ACA finance policy officer Catherine Wolthuizen says that with more cash available, first-time buyers are more likely to push up auction prices. They would then have to compete with investors who will have more equity to use in their existing properties due to the price rises. HSBC chief economist Dr John Edwards said equity loans would likely fuel the housing boom. CommSec senior analyst Craig James said that within a few years the policy could keep newcomers out of the market as the price rises would offset any benefit of people trying to access their first home.
So if the consensus of economists feel that the concept will be self-defeating in its stated aim of enabling first home buyers and low income earners easier access to the property market, why would the Menzie's Research Centre (chaired by Michael Turnbull) still promote it?
It’s interesting to note that Malcolm Turnbull's investment bank, Turnbull & Partners, is in discussions with Wizard home loans. Turnbull & Partners is looking to manage a fund that would be the "silent partner" in the "equity finance" products provided by Wizard.
Turnbull & Partners is working on how to fund the "equity" component, most likely by inviting superannuation investors to put money into a new investment fund managed by Mr Turnbull’s investment bank.
If it is to be self-defeating for first home buyers, how will property investors fare (assuming they won't be restricted from accessing such products once they finally hit the market)?
Existing property owners will do quite well if the boom foreshadowed by the economists materialises. However, it may not be a sensible product for investors to use as 60% of their capital gains will go to the institutional investor. Positive cashflow property investors on the other hand care less about the capital gain, and could fare very well as it appears that they will get to keep 100% of rental income. As they would need only borrow 70% of the purchase price and come up with 70% of the normal deposit, they would be able to purchase more property and it would be even more cashflow positive than if they were making loan repayments on 100% of the property price.
However, as the first product of this type is as yet at least 6 months away, we'll have to wait and see what the features of the final released products will be and whether govt. legislation will exclude certain groups from accessing it.
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